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From Banking and Finance Law Daily, August 11, 2015

Responsible Banking Act preempted by federal, state law

By Colleen M. Svelnis, J.D.

New York City’s Responsible Banking Act is void in its entirety, preempted by both federal and state law, a federal district judge has ruled. The New York Bankers Association (NYBA), which consists of 140 commercial banks and federal savings associations located in New York, was granted summary judgment in its plea to have the RBA declared unconstitutional. The law required banks bidding on municipal deposits and investments to submit community development plans describing the loans, investments, and bank services they would provide to minority and low-income neighborhoods (The New York Bankers Association v. The City of New York, Aug. 7, 2015, Failla, K.).

The court found that “while the animating concerns of the City Council are valid, the means by which it sought to harness banks to redress those concerns intrudes on the province of the federal and state governments.”

NCRC response. National Community Reinvestment Coalition (NCRC) reacted in disappointment to the ruling. NCRC Chief of Membership and Policy Jesse Van Tol said the organization was “very disappointed” in the decision, saying the Act “does not interfere with or impede state or federal bank regulatory measures.” NCRC has also worked to advance similar responsible banking laws in other cities. “The city has a significant interest in banking with institutions that are a positive presence in New York. NCRC and its members will keep fighting to address a lack of neighborhood investment around the country, and the instability it causes,” said Van Tol.

Function of RBA. According to the district court, the RBA has three primary functions.

  1. To complete a written assessment of the “credit, financial and banking services needs throughout the city with a particular emphasis on low and moderate income individuals and communities.”

  2. To use the information it gathers to “establish benchmarks, best practices, and recommendations for meeting the needs identified” in the Needs Assessment.

  3. To compile and publish a report of its findings in an annual report evaluating how each Deposit Bank performed, identify areas of improvement, summarize comments and data. This report was allowed to be used by the Banking Commission when evaluating whether to designate or de-designate an institution as a Deposit Bank.

Legislative history. The court found that the legislative history showed the motivation of the RBA’s sponsors and supports was to gather and make public information such as what work banks do in the community, how many loans they give out to small businesses, and how many mortgages they have modified. The legislative history also showed that concerns were expressed early that it was “not clear how these classifications would coordinate with federal and state regulations” as well as legal concerns about the bill. The Director of the New York State Banking Department’s Community Reinvestment division urged “the City Council to consider an alternative method to achieve this worthy objective,” and the City Treasurer had stated the Department of Finance’s position that “this bill is preempted by federal and state law.”

Preemption. The court determined that the RBA had a regulatory purpose, agreeing with the New York Bankers Association that the text of the RBA and its legislative history show motivation to advance distinct policy goals and that the objective purpose of the RBA is to regulate banks. The court also agreed that the law did not serve a proprietary purpose. The court pointed to the fact that the RBA would cost the City more than $500,000 per year, but would “yield the City—as banking customer—no discernable financial benefits.”

The court also found that the RBA regulates bank conduct. The opinion states that the RBA authorizes the Banking Commission to consider its rankings, even encouraging it, by requiring the Community Investment Advisory Board to send the Banking Commission its Annual Report. “A law need not remove all discretion from an agency’s hands to be considered regulatory.”

The court agreed with the NYBA that the RBA is preempted because it conflicts with federal law, stating the following reasons:

  • examination of a bank’s books and records is not limited to on-site visitation;

  • the act seeks to regulate or influence national banks’ core banking activities, being enacted specifically to influence banks’ behavior, which is covered by federal law, including Office of the Comptroller of the Currency regulations; and

  • the act conflicts with the Community Reinvestment Act because its burdens are greater, it focuses on data at a census tract level, and it employs a public shaming and de-designation protocol for non-compliant banks.

The court also agreed that the RBA is preempted by New York state law because the New York Banking Law evinces its intention to occupy the field of banking regulation for state-chartered institutions.

Severability. The court would not sever the RBA provisions, leaving the rest of the act intact. With no severance clause, the city was required to show that the unconstitutional provisions were severable. The court found that it did not meet this burden. The court determined that the legislature would not have wished the RBA to be enforced without the invalid portions, saying its power had been “eviscerated.”

The case is No. 15 Civ. 4001.

Attorneys: Marc Roland Trevino (Sullivan & Cromwell, LLP) for The New York Bankers Association, Inc. Joshua Paul Rubin, Corporation Counsel Office City of New York, for The City of New York, The New York Department of Finance, and The Community Investment Advisory BoardCompanies: National Community Reinvestment Coalition; New York Bankers Association;

MainStory: TopStory BankingOperations CommunityDevelopment Preemption StateBankingLaws NewYorkNews

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